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Financial distress to trigger divestments, spin-offs and hostile takeovers – EY

4th February 2016

  

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PERTH (miningweekly.com) – With the downturn in the commodity cycle, advisory firm EY expected merger and acquisition (M&A) activity to pick up in 2016, but warned that getting the divestment process right would be paramount in achieving successful sales.

In its latest report, EY noted that after the fifth consecutive year of declining deal volume and values, increasing levels of financial distress would trigger more divestments, spin-offs, joint ventures (JV) and possibly hostile takeover bids.

However, EY global mining & metals transaction advisory leader Lee Downham said on Thursday that with a glut of assets, scarcity of capital, selective buyers and market conditions forcing accelerated sales, getting divestment processes right would be paramount to achieving a sale for even the best quality assets.

“A company’s positioning on the cost curve is critical in the current market conditions, so presenting robust information to potential buyers is pivotal in order to provide confidence that cost reduction and productivity measures are sustainable.

“Similarly, anticipating transaction risks such as separation and regulatory and JV approvals take on greater importance in this market. Prospective buyers are thin on the ground and they will reduce valuation, or even walk away, if these issues aren’t adequately addressed.”

Overall mining and metals deal volume globally in 2015 sank to the lowest level since at least 2000, with just 358 deals completed. Excluding the $8.7-billion BHP Billiton demerger of South32, overall deal value globally dropped to $40-billion, with a strong bias to domestic deals and assets in developed markets.

Capital raised in 2015 was down by 10% year-on-year, owing to a sharp drop-off in loan finance to the sector, which fell to $44-billion from the $122-billion in 2015.

The EY report noted that much of the capital raised in 2015 was for the refinancing of existing facilities, emphasising the limited new finance going into projects.

“Perhaps the greatest concern within the industry is that nobody is sure how long the current downturn is going to persist, and companies cannot sit back and wait for an improvement in market conditions. This is forcing many corporates to downsize portfolios, and be pragmatic on valuation, which, in turn, will create deal activity,” Downham said.

For 2016, EY predicted that more deals would be completed by private capital, but only the best assets would attract their focus and pricing would remain disciplined.

Furthermore, deferred consideration would grow in popularity owing to limited buyers and extreme price uncertainty, while spin-offs as a means to package and divest assets had increasingly been featured in boardroom discussions, and would remain high on the strategic agenda, with the level of working capital required, however, seeing few actually completed.

EY also predicted that mergers and JVs would be increasingly pursued, with the key focus on de-risking and preserving capital. The necessity to de-risk and preserve capital will drive deals to completion.

Ongoing price volatility could also see hostile takeover bids from better capitalised entities, but only where the takeover target operated desirable, low-cost assets in stable jurisdictions.

“It’s likely there will be material ownership changes across the sector in 2016, with new players taking on positions, larger players downsizing portfolios and some businesses not surviving,” Downham added.

Edited by Mariaan Webb
Creamer Media Senior Deputy Editor Online

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